The Secure Act and Estate Planning Implications
On December 20th, President Trump signed The Secure Act into law which took effect January 1st. The purported intent of the law is to expand opportunities for individuals to increase their retirement savings. However, one provision of the act is a huge step backward for a very popular estate planning strategy.
Before we dive into the estate planning implications of the act, three of the major provisions of the act are worth mentioning: 1) Previously, one could not make IRA contributions after reaching age 70.5. Under The Secure Act, this restriction is removed and contributions can be made as late into retirement as one wishes. 2) Qualified Charitable Distributions (charitable contributions made directly from one's IRA) will now be reduced based of the aggregate amount of deductions in years prior. 3) Required minimum distributions began at age 70.5, but The Secure Act raises that to 72.
In terms of the estate planning impact of the act, the major change is how Stretch-IRAs can be used. A Stretch IRA is a standard IRA which names a beneficiary who is then able to continue to take minimum distributions from the account while enjoying some continued tax-deferred growth. The schedule of these distributions is beyond the scope of this post, but in essence, rather than inheriting an IRA all in one lump sum (thus requiring all deferred income taxes paid at once), the beneficiary could continue to defer the taxes and have more control over the tax impact of these distributions.
Under The Secure Act, this "stretch" IRA opportunity has all but disappeared. It is important to note that this opportunity no longer exists for most beneficiaries, but not all. One inheriting an IRA from a spouse can continue to stretch it out under the old rules. The act also includes exceptions for minor children, the disabled and chronically ill, and those within 10 years of age of the deceased. But for all other beneficiaries, the days of the Stretch IRA are over.
So what happens if you do name a non-spouse or non-exempt beneficiary of your IRA? First, they do not have any required minimum distributions, which seems like that would be an advantage. However, the entire account must be liquidated within 10 years (or face penalties up to 50%!). So although a beneficiary is not forced to take income in Year 1, that only leaves 9 years in which these distributions can be spread out--which is not a lot of time. If distributions are postponed until later years, the beneficiary will likely find themselves forced into high tax brackets for those remaining years.
Unfortunately, there is no real lateral equivalent to the Stretch IRA that we can avail ourselves of. However, retirement cash flow planning, distribution planning, and other conscious decisions can mitigate the negative impacts of forced income, while also maximizing other available tax planning opportunities.